Several years ago, I became friends with a young woman who was just getting started in real estate. She became a real estate agent, learned about renovation, and made a ton of money flipping her first house. Thanks to some luck and some serious persistence on her part, she ended up on an HGTV show about flipping houses, where she appeared in several episodes as part of an Atlanta investor team.
The show made it look simple: find a cheap home for sale, put some money and sweat equity into fixing it up, then resell it for a huge profit. So I asked her if flipping houses was as easy as it looked on TV.
She laughed and shook her head. “We make it look easy,” she said. “But it’s risky, backbreaking work. It can be fun, but if you don’t know what you’re doing, you’re sunk.”
So how do you know if you’re up to the challenge?
What Is House Flipping?
House flipping is when real estate investors buy homes, usually at auction, and then resell them at a profit months down the road. Can you make money doing this? Yes. Can you make a lot of money doing this? Yes. But you can also lose everything you own if you make a bad decision.
Risk vs. Reward
Imagine buying a house for $150,000, investing another $25,000 in renovations, and then…nothing. No one wants to buy it. You now have to pay for your own rent or mortgage, plus the mortgage for your flip property, as well as utilities, home insurance, and property taxes. You might also have to pay for home staging and realtor fees when the house finally sells. All of this cuts into your potential profit.
According to CNBC, house flipping is the most popular it’s been in a decade, yet the average return for flippers is lower than in previous years. Thanks to a hot housing market that’s raising prices, low inventory, and soaring rents (which drive even more people into home buying), it’s getting harder to make huge profits.
The average gross profit on a house flip during the third quarter of 2017 was $66,448, according to ATTOM Data Solutions. That’s more than many people make in a year, and it lures plenty of newcomers who dream of quitting their day jobs and becoming full-time investors. However, the investors making this much money really know what they’re doing — and even they still go bust sometimes.
RealtyTrac found that in 2016, 12% of flipped homes sold for break-even or at a loss before all expenses. In 28% of flips, the gross profit was less than 20% of the purchase price. According to RealtyTrac senior vice president Daren Blomquist, 20% is the minimum profit you need to at least account for remodeling and other carrying costs.